Cisco Systems, Inc. (CSCO): Getting Risk-Free Daily Income

George Leong: We saw some decent buying on Tuesday but overall, stocks have been languishing early on in 2014, which has some traders concerned that a correction may be brewing.

However, I’m not sure that’s the case. The stock market may just be taking a breather following its superlative gains in 2013. I’m not surprised; in fact, I expected this would happen.

This year will likely be a more difficult year to make money, as the market is looking for reasons to buy. I still feel the direction of the stock market will be up, but it will be at a slower rate.

Now, if the stock market should continue to stall or gyrate in a sideways channel around record highs, you could take advantage of this without adding stocks.

You can earn daily income on your existing stock market holdings without having to pick up dividend stocks or shift capital into low-paying bonds. And my strategy is pretty easy and straightforward.

I’m referring to the use of writing covered call options on some of your key long-term core holdings to generate premium income and reduce the average cost base of your positions. By writing covered call options on your existing holdings, the premium income added could allow you to earn some daily income. But you need to be comfortable with possibly losing a holding.

For those who are not familiar with covered call options, the execution is simple: all you do is sell or write call options on one of your stock holdings, and in return, you’ll receive a premium for assuming the risk. You select the month of expiry and strike price, which is the price at which you are willing to sell your stock to the buyer of these call options. Make sure you are comfortable with the upper strike price of your covered call options and that it’s above the key resistance for that stock.

Let’s take a look at Cisco Systems, Inc. (NASDAQ:CSCO) as an example. Assume you own 100 shares of Cisco at a cost base of $15.00 per share. You are already up $7.47 a share based on the prevailing market price of $22.47 as of January 14.